The international economy: Practice Questions

• a.

  The use of a common currency to eliminate exchange rate risk.

• b.

  Both countries having identical production possibility frontiers.

• c.

  One country being able to produce all goods with fewer resources than the other.

• d.

  Differences in the opportunity costs of producing goods.

• a.

  Can produce more of the good with the same amount of resources than another country.

• b.

  Has a larger total endowment of natural resources required for that good.

• c.

  Can produce the good using fewer labour hours than any other country.

• d.

  Can produce the good at a lower opportunity cost than another country.

• a.

  An increase in domestic productivity that leads to a significant decrease in the cost of producing imported substitutes.

• b.

  An appreciation of the domestic currency in a floating exchange rate system combined with stable global prices.

• c.

  A decrease in the domestic rate of inflation relative to the inflation rates of the country's main trading partners.

• d.

  A fall in the world price of the country's primary export commodities and a rise in the world price of its essential imports.

• a.

  Purchases of shares in foreign companies by domestic residents.

• b.

  The sale of government bonds to overseas investors.

• c.

  Foreign direct investment flows into the domestic economy.

• d.

  Primary income, such as interest and dividends from overseas assets.

• a.

  A sustained increase in the domestic rate of inflation relative to its major trading partners.

• b.

  A significant increase in the productivity of the domestic manufacturing sector.

• c.

  The implementation of an expenditure-reducing policy such as an increase in income tax.

• d.

  A depreciation of the domestic currency in a system of floating exchange rates.

Write your answer out first, then check it against the worked solution.